Pastrick Questions Need for New Mortgage Rules

New-Mortgage-Qualification-RulesAs debate rages about new mortgage rules, one analyst is calling for a hands off approach.

Helmut Pastrick, the chief economist of Central 1 Credit Union  suggests that Canadian housing prices and debt levels are under control.

Pastrick told an FP reporter that no tightening of existing mortgage rules is needed.

His reasoning:

  • “I don’t see a price bubble and I don’t see that we need the mortgage criteria tightened as is suggested in some quarters.”
  • Helmut-Pastrick-Central-1-EconomistPastrick said if Ottawa heeds the calls of Canada’s big bankers to tighten mortgage lending rules, it will likely just slow the economy, “potentially triggering a domino effect ending in a slump in the housing market.”
  • He acknowledges that consumers are relying more on debt, but says the 150% debt-to-income level making headlines is a purely “arbitrary” number.
  • Pastrick said the real estate industry is an important economic driver, generating countless jobs in everything from construction and manufacturing to sales, and that if it slows down, the result will show up in declining employment.
  • “If you slow down the housing market that in turn slows down the economy.”
  • Noting that most forecasters are already calling for slower growth in 2011, he said it doesn’t make sense to add to the negative pressure by artificially pushing down demand for homes.
  • Pastrick also referenced prior rule changes whereby maximum insured amortizations were cut from 40 to 35 years. “I didn’t think [the market] needed it at that time either… the market was already in adjustment phase, housing sales were moving down… So there was no bubble developing at that time, nor is there one developing now.”

Central 1 Credit Union is the $10 billion central finance facility for Ontario and B.C. credit unions. It represents member credit unions who serve 2.9 million Canadians.

 


Steve Huebl, CMT

 

  1. So, this guy openly states that he didn’t think the market needed a change from 0% down and 40-year amortizations… shocking that he doesn’t think a change from 5% / 35-year is needed either!

  2. Pastrick is absolutely right. The housing market will correct itself. People don’t need government on their back telling them how to spend.
    Letting Ottawa restrict peoples’ ability to budget is a slipperly slope. Next thing you know the Finance Department will be setting maximum credit card limits.

  3. I laugh very time I read ” TD and BMO call for tighter mortgage rules”
    Here is my reasoning, your mortgage is the cheapest form of debt you have. Most people I see are spending more money on their car loans, lines of credit, and credit cards then their mortgage every month.
    So how is restricting mortgage’s availability going to help with debt loads? Basically it means that your only option is continue to pay 5-20% for all your debts instead of 2-4%…
    hmmm, do we know anyone who would benefit from canadians pouring more of their money into interest costs, and less into principle and appreciation? Oh right, the same banks that are pushing for tighter rules for mortgages.
    When I see bank saying they are pushing for tighter rules on car loans, PLOC’s and credit cards, they I might pay attention. But this is just BS, plain and simple, and I for one am not buying…

  4. Why is the government taking advice about amortizations from bank CEOs? What does a millionaire CEO with a $5 million mansion know about affordability?
    Clark, Downe and these other bankers are out of touch with the cost of living. Look at Clark’s salary: http://people.forbes.com/profile/w-edmund-clark/76839
    Let’s see him try to buy a house in Toronto with a 25 year amortization and an average wage. I’m sure he’d be really comfortable in a 400 square foot condo with two kids.

  5. Good for Pastrick. What difference does it make if we have 100 year amortizations as long as people qualify. If you’re not a risk or burden to society then your amortization is no one’s business.

  6. You do realize that the only reason people can get those giant mortgages in the first place is because the Government is guaranteeing the loans???
    If you were to remove the Government from the equation, the amount that banks/credit unions would loan people would be LOWER, not HIGHER (and the rates would be higher for highly-leveraged borrowers). The banks’ risk models would not allow them to take on the types of high-leverage loans that they do today.
    So, before you try to promote a Canadian Tea Party movement, understand that mortgage money isn’t free and infinitely available to everyone.

  7. Wow.
    $15M a year = $1.25M/month = $41,667 per day!
    Mr. Clark could buy about 5-6 of those 400 sqft condos (in cash) every month!

  8. Pastrick is just another talking head with a biased interest in keeping the party going til the bitter end to pacify his credit union bosses and to keep profit flows rolling in.
    I guess he wants to see home prices at 15 times income and will still say they are “affordable”. This guy is the biggest joke out there…with a market so clearly overvalued.

  9. God bless the government guarantee on mortgages.
    Bill Gross of PIMCO, the world’s largest bond fund, said in the absence of government guarantees he wouldn’t put money into residential mortgage for less than a 12% rate. The downpayment he’d want to see would be “higher” too (didn’t elaborate).
    The government is making the RE market, as such they get to call the shots. Shorter am’s are coming, make your capital decisions wisely.

  10. Right on Blair. With interest rates this low, consumers are looking to their mortgages to save money over the other forms of credit which interestingly enough are all offered by the banks. It is in this form of lending that the banks have very comfortable margins and very little competition. What little competition they have is coming today from the mortgage sector and what a good way to curb that access then by getting the government to limit consumers’ ability to to use their current home equity. Bank profits are down and the they are making an attempt to illicit government help to solve that problem…. shame on them.

  11. Less government in a perfect world, problem is the majority of people aren’t that smart and need the government to save them from themselves.
    I am sure we all know someone who is highly educated but maxed to the hilt and one pay cheque away from self destruction.

  12. Who says I’m never going to pay off the loan? Maybe I’m self-employed and want to minimize my required payment while making pre-payments to shorten my amortization. The point is, if I qualify for a mortgage you shouldn’t get to judge me for how I handle my finances.

  13. I would say abolish HELOCs (which are a relatively new invention) instead of tightening mortgage rules even further. The main cause for concern is not that people won’t be able to afford their mortgage. Those who take an ARM at today’s low rates and find themselves under the gun when rates increase again always have to option to convert to a fixed-rate during the term.
    It’s the fact that more people are digging themselves into a deeper grave by believing (falsely) that their house is a bank. For most people the mortgage payment is a fixed amount. However, constantly being leveraged by tapping into your home’s equity is another matter altogether, one that can spiral out of control if rates go up or if the main provider becomes disabled.
    The banks, naturally, want to see people getting into more debt. After all, when people don’t carry debt banks don’t make money. Since the banks’ bread and butter has always been (and will be) the personal banking segment, providing consumers with the credit they need is integral to the banks’ bottom line. So in the eyes of the major banks debt is a good thing — up to a certain point. After that they look up to Ottawa to take over and impose additional regulations.

  14. TO be fair, with the exception of his salary and any other expenses that the bank pays for, most of that compensation is in the form of deferred shares and he actually donates a lot of shares to charity. This is not to say, of course, that he’s starving but he’s not getting $15 million in cash a year. Why would you take cash in the first place? =)

  15. Agree entirely and so simple to understand. Debating 25, 35 or 40yr. amort’s is pointless. You can and could always have a variation of 40 or 100 year amort. It’s called resetting the amortization at renewal.
    Heavy restrictions on qualifying for so called “good debt” is only self-serving to the banks since they are still giving out consumer debt or new car loans with 10% or less down payments. Everyone knows car depreciate 15-20% the minute you drive it off the lot and worth a small fraction of what you paid by the time the loan is paid off.
    You don’t break what is not broken but if regulators want to get Canadians off the forever ever debt plan, they need to tackle total consumer debt and not one component, the housing sector.
    They would accomplish more regulating the TDS ratio but that is not what this discussion is about. Its about narcissistic politicians and over paid bankers, blinded by stage lights meddling in our personal affairs.

  16. I stopped reading after “I don’t see a price bubble.”
    [Edited. No insults please. We try to keep these forums constructive and derogatory comments don’t help. Thanks. -CMT]

  17. Common sense is so refreshing but so uncommon. You nailed it Banker in an ivory tower. Everyone knows that debt junkies are a hazard but most of us aren’t debt junkies. OK. Make it harder for the high risk person to borrow. I have no problem with that, but don’t cripple the rest of the country with unecessary mortgage restrictions.

  18. I am a mortgage broker who deals with a good number of clients that are referred to me from Financial Planners. A great deal of what I do with these clients are refinancing debt in order to pay off higher interest debts, and provide additional cash for investment vehicles. The purpose of the Refinance is not to increase cash flow, but rather to take advantage of current artificially low interest rates and pay off those longer term auto loans, boat loans, etc. These clients are essentially maintaining the same payment schedules as before but are now relying less on having to pay higher interest rates on other forms of credit.
    Does anyone know if Bank’s are experiencing less expected growth on their other (potentially) more profitable areas? I agree with some of the earlier posts, that many of my clients current loan pmts are often equal to their mortgage pmts. and if we are going to address one sector of the Banking industry, let’s take a look at consumer lending as a whole. If rates get out of control, what do you think a consumer will default on first… Their house or their other unsecured debt?

  19. How about we repeal taxes for everyone making under $100,000 a year?? That would really help affordability!!
    Woooooo hooo!
    Here’s a better solution to affordability…..
    Get off your keister, work hard as a mofo, and make more money!!! How’s that for a new idea??
    While you’re at it, stop bellyaching and blaming government because you can’t afford your dream house. Live within your means man!!!

  20. “…what do you think a consumer will default on first… Their house or their other unsecured debt?”
    You got that right Bob. In addition to a general desire to keep a roof over one’s head, Canada is fortunate to have a recourse system that makes defaulting on mortgage obligations a very unpleasant experience…

  21. “If you are not free to choose wrongly and irresponsibly, you are not free at all.”
    – Jacob Hornberger (1995)
    Give me freedom. I’ll take my chances with debt.

  22. If Helmut wants easy credit I’m fine with that as long as we take away taxpayer backed insurance for that debt.
    Abolish the CMHC and let private insurance take over, then Mr. Pastrick has my blessing to offer people 40, 50 or 100 year mortgages.

  23. I’ve only been in the housing market since 2002 but I personally have never paid more than 4.50% on my mortgage in that period of time. That being the case, are the interest rates really artificially low or is 5% and under the new norm?

  24. Your lack of insight astounds and annoys me. The amazing staff at CMHC day in, day out, do a great service to Canadians in countless ways in helping struggling Canadians and especially aboriginal Canadians improve their living standards. All without receiving any direct government assistance. I know since I once worked there in a Team Manager capacity.
    Furthermore, CMHC, a crown corporation, has earned tax payers a net income of 9.5 Billion and paid about another 1/3 of that amount in income taxes over the past 10 years.

  25. Hi Best Place,
    Is your concern that the government’s guarantee of insured mortgages puts taxpayers at risk?
    If so, allow me ask some honest questions for sake of debate:
    1) How do you (personally) quantify this risk?
    2) If this risk is infinitesimal as regulators believe, is that risk then largely offset by benefits realized by Canadian homeowners and the economy at large?
    3) What default rate(s) do you project on insured mortgages going forward?
    4) What probability do you assign to these default rates being realized?
    5) What is the economic benefit (in terms of GDP growth, additional employment or other objective statistics) that’s derived from a highly regulated and government-sponsored housing market?
    These are the types of questions we need to answer in order to have a rational debate about “taxpayer risk” and taxpayer reward. Let’s talk some real numbers and see how the argument plays out.
    The Finance Department, insurers and mortgage industry have built the foundation of Canada’s housing market on the belief that government support of the mortgage market benefits Canadians. One main benefit is greater stability to the real estate market. That benefit was clearly illustrated during the credit crisis, when so many other international housing markets collapsed.
    So let’s examine together how this benefit could possibly be offset by the “risk” you foresee. The five questions above are a good place to start the dialogue.
    Cheers,
    Rob

  26. Rob,
    The answers to your question are simple. The GDP benefit is in the hundreds of billions and mortgage default rates will be low.
    However, your argument is spurious. Government sponsorship produces positive GDP effect in ANY area it is applied too. Do you understand?
    We can build bridges everywhere, guarantee car loans to enhance car ownership, guarantee small business loans 100% (instead of 80%) to have lots of small businesses etc.
    All that could be done but does it make any sense?
    Go one level further from your questions and test government sponsorship with this criteria:
    1) Does is create a diverse, robust economy
    2) Does it provide a competitive advantage for Canada’s international trade and a positive trade balance
    3) Does it create a decades long, growing machine that makes best use of Canada’s human and capital resources.
    By your measures Vancouver’s Olympic Village produced $1 billion of GDP…the reality is hardly the case.

  27. If a pending crisis still exists on the horizon and as is being suggested, exasperated by government guarantees of debt, I am genuinely interested in what real solutions and alternatives to government guarantees critics suggest?

  28. It’s not all about GDP, international trade, economic development and the construction industry.
    What is missing from all of these CMHC debates, time and time again, is that CMHC is a federal housing policy tool.
    Any discussion about removing CMHC loan guarantees or changing any other aspect of its mandate/operations must be accompanied by an examination of the other tools that will replace it’s role and purpose in national housing policy, and their economic and social benefits/costs.

  29. …to add: the comment above is neither for/against the CHMC’s role, just pointing out that if we’re going to alter its mandate, something will have to take its place and any discussion that fails to take into account the economic and social implications of what replaces it is incomplete and not particularly relevant.
    Yes, that is a very difficult discussion fraught with “what-ifs”, but that’s policy for you.

  30. To clarify, I wasn’t suggesting that your article needs to incorporate that policy angle – that’s a broad discussion … it was more to the posters who want to change aspects of CMHC lending guarantee policies but may not realize that decisions like that can’t be made in isolation.
    This blog and its commenters are always interesting. Thanks for maintaining it.

  31. Hi Tomas,
    I’m going to differ and say the answers are not so simple, which is partly why critics rarely address them.
    I’d also suggest that there’s no need for the “spurious” comment. We can debate things on fact alone, like gentlemen.
    There are few in economic circles that would question the positive economic effects of Canadian housing policy. The issue therefore lies in the risk of this policy. That is what we’re focusing on because it’s the crux of critics’ “regulate more” position.
    By the way, with all due respect, comparing mortgages to guaranteeing car loans (which are higher risk depreciating assets) or the Olympic village isn’t a fair analogy. :)

  32. Hi Matt,
    In simplistic terms, the new norm should definitely be lower than the old norm. For what it’s worth, most analysts expect long-term rates to generally stay below the 1980-2010 average, barring occasional spurts of 3%+ inflation down the road…
    Cheers,
    Rob

  33. No offence meant Rob. I thought you were justifying CMHC real estate sponsorship by virtue of RE’s contribution to GDP. This is not a valid justification (ie “spurious”) because everything the big G spends on adds GDP.
    I’m unclear why a replacement for CMHC is a prerequisite for criticizing their role. However, i’m game – let more private operators like Genworth insure mortgages and hold these private insurers to the same capital ratios as banks.
    Then the “real” cost of mortgage insurance will be seen.t

  34. Hi Tomas,
    Economic benefits are indeed one of the justifications for government-sponsorship of housing (but not the only one as noted).
    I’d respectfully differ that not everything the government spends money on is a positive or good contributor to GDP over the long run. In the case of mortgage guarantees, the government isn’t spending anything. CMHC’s MI operations are actually generating billions in profits for taxpayers, and have been for many years. The debate is whether those profits are offset by other risks, which most believe is not the case.

  35. Rob,
    CMHC reported 930M profit in 2009.
    I’m in no position to dispute that figure, however if that was the “real” profitability should the insurance function not be part of the private sector…competitively driven, creating jobs?
    The “spending” of money is mis-leading isn’t it? An insurance company doesn’t spend (ie. the core act of collecting premium and paying on contingency).
    I agree with you that CMHC risk vs CMHC profit is a basic question. I think a second question, whether CMHC sponsorship is at a too high or too low level, is also worth exploring.
    I also suggest the risks of CMHC activity go far beyond mortgagee default.
    As a fella in the broker field would you like to see more private mortgage insurance, or do you favour the status quo?

  36. Hi Tomas,
    Even if CMHC was privatized there will probably always be a government mortgage guarantee. Generally speaking, Canadians want the government to support housing, and all the personal and economic benefits associated with that.
    To your question about sponsorship being too high, some would say the guarantee needs to be ratcheted down to the same level as Genworth and Canada Guaranty. I tend to think that’s not the worst idea. It would partially quell the minority’s concerns about lenders not having enough skin in the game. In addition, it would put all insurers on the same playing field.
    Cheers,
    Rob

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